Democrats Warn That Paul Ryan's Medicare Plan Would Reduce Federal Health Care Spending

Rep. Paul Ryan, the top Republican on the House Budget Committee, has been pushing reforms of Medicare and Medicaid for a while now. With various versions of his Roadmap for America's Future, as well the Medicare reform plan he put together with former Democratic budget chief Alice Rivlin, Ryan has been arguing that the key to bringing the nation's long-term fiscal path under control is limiting the federal commitment to health care spending. 

Tomorrow, Ryan will put forward his most high-profile reform proposal yet. The GOP budget proposal, prepared under Ryan's leadership, is expected to call for cutting $4 trillion from the budget over the next decade, block-granting Medicaid, and converting Medicare into a voucher system run through competing private plans. Here's The Wall Street Journal with the basics:

Though Rep. Ryan based the Medicare portion of his budget on a previous plan created in collaboration with a Democrat, Alice Rivlin, a senior fellow at the Brookings Institution and long-time budget expert, the current plan isn't likely to get much Democratic support. Instead, it will set up a broad debate over spending and the role of government heading into the 2012 general election.

The plan would essentially end Medicare, which now pays most of the health-care bills for 48 million elderly and disabled Americans, as a program that directly pays those bills. Mr. Ryan and other conservatives say this is necessary because of the program's soaring costs. Medicare cost $396.5 billion in 2010 and is projected to rise to $502.8 billion in 2016. At that pace, spending on the program would have doubled between 2002 and 2016.

Mr. Ryan's proposal would apply to those currently under the age of 55, and for those Americans would convert Medicare into a "premium support" system. Participants from that group would choose from an array of private insurance plans when they reach 65 and become eligible, and the government would pay about the first $15,000 in premiums. Those who are poorer or less healthy would receive bigger payments than others.

Ryan told Politico that the entitlement reforms, along with the size of the cuts he's proposing, would give his political opponents a "weapon." And sure enough, Democrats are already putting that weapon to use targeting GOP legislators. From the Journal, here's the basic talking point:

Democrats say the GOP plan will leave millions exposed to financial risks. The Medicare premium subsidies would grow more slowly than health costs, they say, so seniors would end up with less coverage.

"All this does is shift the risk and burden of rising health-care costs to seniors on Medicare," said Rep. Chris Van Hollen (D., Md.), the top Democrat on the House Budget Committee. "You're on your own with the insurance industry."

The plan's supporters say it would cut costs without sacrificing quality by introducing competition among insurers.

So Democrats are warning that voucherizing Medicare would mean that the federal government spends less money on health care. Federal spending on our most expensive health entitlement, they say, would no longer keep pace with inflation. Well…yes. That's kind of the point.

As it stands, the federal government maintains what is effectively an unlimited commitment to health care spending for seniors. But given the current projected growth in health spending over the next several decades, that commitment simply isn't sustainable. Even President Obama recognizes that the health entitlements are at the heart of our long-term fiscal problems: "Medicare and Medicaid are the single biggest drivers of the federal deficit and the federal debt by a huge margin," he said in 2009. 

That means that the federal government's commitment to health care spending must be limited somehow. That's the basic problem that Ryan is trying to address, and voucherizing the program is the way he's chosen to do that. Which means that Democrats are complaining, essentially, that Ryan is solving the problem he's set out to solve.

But what about seniors? Would they be left behind as health inflation outpaced their vouchers? I think there are good reasons to believe that vouchers would help keep medical costs in check by introducing some much-needed price signals into the marketplace for medical care: Under the current state of affairs, neither health care consumers nor providers have any incentive to think about costs. In a voucher system, by contrast, individuals would shop for plans and services that fit their needs. Providers would factor cost into their service offerings. Competition would revolve around providing the best service for the least money. Insurers, meanwhile, would work with providers to build plans that remained affordable over the years—and would likely build their plans around the dollar amount provided by the voucher. If anything, this is a negative aspect of a voucher system: Health plan innovation would likely be driven by the politically determined value of the voucher.

It may not be ideal, but it would be a first step away from the federal government's decades of unchecked taxpayer-funded medical spending—and toward a world in which market pressure and individual decision-making would begin to restrain the growth of health care costs.

Naturally, long term spending and inflation trends—as well as behavioral uncertainties—make the long term effects difficult to predict. But we know from a variety of studies that individuals can and do act like rational consumers in the health care market when given incentives to do so, and that savings are the end result. Ryan's plan, in a slow and imperfect way, would start the U.S. health care system on a path toward giving more individuals those sorts of incentives—and in the meantime would end the unlimited, unsustainable commitment to health spending that's set to wreck the federal budget. 

Read my Reason feature on Paul Ryan and his budget plan here.